Zambia wrestles with mining future

Zambia wrestles with mining future

For rural communities dotted along Zambia’s Copperbelt, talk of decline in the mining industry might seem a little premature.

Twenty-six-foot-high trucks, their outsized tyres churning up the red earth, continue to haul payloads of ore through the rocky landscape – the first link in a chain stretching from the mines and smelters of Central Africa to the electronics stores of the West and beyond.

And yet despite the familiar sights and sounds of large-scale extraction, the future of this frenetic activity depends on the outcome of a shaky détente between government and mining houses following months of acrimony.

With a new administration bedding in under Edgar Lungu, a president seemingly determined to repair fraught relations with the mining houses, there is renewed hope that government and industry can forge a lasting compromise in a crucial sector responsible for some 11% of Zambia’s GDP.

Speaking at the Zambia Mining Investment Forum in London, John Gladston, head of government affairs at Canadian miner First Quantum Minerals, said that the industry appears to be back on track after a difficult few months.

“I have every confidence that with the current vector we see from government in terms of ability to change the tax regime, we will see the sector move back to the good times and Zambia reclaim its position as Africa’s Number One.” That status has been in peril since 2014, when Zambia’s previous administration – led by the late Michael Sata – decided to increase the sector’s contributions to government coffers.

It was intended that increasing royalties would more fairly distribute the proceeds of the industry, which the World Bank says accounted for some 16% of government taxes and revenues in the last four years. The African Economic Outlook estimates that over 60% of Zambians continue to live in poverty. Meanwhile, in 2012, mining houses were accused of contributing to large-scale tax evasion worth around $2bn a year through tactics such as transfer mispricing.

But having rattled mining houses with proposals to levy up to 20% in royalties on open-pit mines, a series of threats by major investors to mothball operations forced a government rethink. That process was hastened by January’s election of Lungu, and an extended period of plunging commodity prices as a result of slowing Chinese demand.

In an interview with African Business, Christopher Yaluma, Zambia’s minister for mines, energy and water development, said that an extensive consultation process with industry and trade unions has now helped to secure a workable compromise.

“When we went into power, we had campaigned on promises that we’d create a lot of employment. The mining houses told us that by hiking the rate, you are killing our businesses, which means laying off and retrenching. The majority of workers would like to see employment secured and are coming to government asking to address this.”

That compromise involves a climb-down over the 20% royalty rate that had been planned for open-pit mines.

Instead, the government will charge 9% for royalties on open-pit mines and 6% on underground mines. With the World Bank forecasting that Zambia’s copper production will soon peak without continued investment in mine extensions and scale economies, that need to secure further capital has taken on an added urgency.

Ongoing concerns

However, despite expressing support for this renewed engagement, there are signs that the industry will push for further incentives before deciding to ramp up capital expenditure.

“Going forwards, this might include discussions on Zambia’s obligations under the WTO [World Trade Organisation], looking more closely at export tariffs perhaps,” First Quantum’s Gladston told a recent panel.

“Also we would see the distinction between underground and open-pit mines as divisive – we are a firm believer that a sufficiently elegant tax regime should be one solution fits all.”

The question of taxes yet to be paid is another topic that will require tough negotiations in the months ahead; mining houses claim they are owed over $600m in a long-running dispute over VAT refunds.

Tom Albanese, chief executive of India’s Vedanta Resources, a major copper producer in Zambia, said that solving the issue around VAT remains crucial to getting the industry back to competitive shape.

“I think it’s going to be just critical for government to build on the VAT message and put it in place,” he said.

“That’s probably the single most important thing: both the VAT post-February 28th in terms of parliamentary agreement on reimbursing that, and also large VAT receipts from before then. World capital markets are watching, and resolution will do a lot in terms of stabilising the situation.”

Even on this long-running issue – payments to mining firms are particularly unpalatable for a government battling slowing growth and a wider fiscal deficit – there are signs that a compromise is within reach. Yaluma said that the government had already begun to repay some of the amounts owed.

“We are very committed to repaying. We have started to pay and that’s to clear the debacle,” he said.

Powering the future

Having secured early signs of success with his task of easing relations with mining houses, Yaluma will have to draw on an alternative set of skills to ensure the long-term future of the industry.

With droughts having taken their toll on water levels in crucial hydroelectric plants, Zambia is facing significant power shortages – hardly an ideal scenario for energy-hungry extractive companies.

In early July, media reports suggested that state power company Zesco will have to slash power to the mining sector by up to 30% in a move which miners have indicated will further damage their businesses.Subsequent comments from government figures suggested that the Lungu administration has ordered the utility to spare the mining industry those cuts.

As a former engineer at the Zambia Electricity Supply Corporation and South Africa’s Eskom, Yaluma brushed aside concerns around long-term supply while remaining sanguine about current shortages.

“The only supply deficit we’ve got is from some low-water-level dams which is contributing to some amount of shortage, but we’ve also got contingencies in place to make sure we address that,” he said.

Yaluma expects around 300MW of coal-fired power to come online soon, with a further 120MW added from new hydro sources from August. Despite expressing concerns on the current shortages, it appears he has industry singing from the same hymn sheet.

“In a country that is hugely well endowed with hydropower, [shortages] might be a difficult thing to accept. But when new power comes online I think the days of those power outages will be firmly behind us,” said First Quantum’s Gladston.

Balancing act

This new spirit of cooperation appears to mark a break from the more hostile negotiations of recent years. And having noted government compromises, there are signs that mining houses are beginning to reassess their own obligations to Zambia.

“The industry has been part of the problem. We’re recognising that with the Chamber of Mines we have to be as open as we can be about the transparency of our financial reporting,” said Vedanta’s Albanese.

“From the perspective of a normal person in Zambia, they see us driving around with 100-tonne trucks so the immediate response is: we must be making a lot of money. We have to be much better with communications and public education.”

In the long run, Zambia has been urged to embrace a diverse economy and move away from a model that the World Bank says remains “dominated” by extraction at the expense of developing other sectors.

But while the industry continues to command the national narrative, ensuring that mining is economically viable for companies but also actually benefits the country’s citizenry is paramount. Yaluma’s refusal to fix taxes for several years might gall some mining multinationals, but the minister hopes that leaving his door open to constant dialogue will help to offset any remaining industry doubts.

“If the mining industry starts collapsing, I’ll go with it to my grave,” he said. “I am the representative of the government and I must ensure what we are doing for mines is something that won’t cripple the economy and industry. We need to apply our minds”.

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